Note 7 - Income Taxes

The provision for income taxes consisted of:

(In thousands)	2012			2011		2010

Current:
Federal	$	19,581		$	11,318	$	15,514
State		2,601			1,210		1,360
Puerto Rico		79			0		0
Total current		22,261			12,528		16,874

Deferred:
Federal		(2,692	)		2,918		(1,220	)
State		(304	)		122		(183	)
Puerto Rico		(350	)		0		0
Total deferred		(3,347	)		3,040		(1,403	)

Total provision	$	18,915		$	15,568	$	15,471

We realized a tax benefit of $1.4 million, $1.6 million and $626,000 in fiscal years 2012, 2011 and 2010, respectively, as a result of the exercise of stock options and the vesting of restricted stock, which is recorded in shareholders' equity.

Reconciliation between the statutory federal income tax rate and the effective income tax rate is as follows:

Fiscal years	2012			2011			2010

U.S. Federal statutory tax rate		35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal tax benefit		4.8			2.1			1.6
Puerto Rico		(0.6	)		0.0			0.0
Effective income tax rate		39.2	%		37.1	%		36.6	%

We recorded $162,000, $328,000 and $222,000 in federal employment related tax credits in fiscal 2012, 2011 and 2010, respectively. Each of these credits reduced our effective tax rate in the respective years. For fiscal 2012, approximately 1.3% of the increase in our effective tax rate as compared to fiscal 2011 was due to the non-deductible portion of compensation attributable to the retirement of our former President and Chief Executive Officer. Additionally, in both fiscal 2011 and fiscal 2010, we recognized a decrease in our state and local income tax rate due to favorable settlements with certain taxing authorities.

Deferred income taxes are the result of temporary differences in the recognition of revenue and expense for tax and financial reporting purposes. The sources of these differences and the tax effect of each are as follows:

(In thousands)	February 2, 2013			January 28, 2012
Deferred tax assets:
Accrued rent	$	2,878		$	2,301
Accrued compensation		5,191			2,849
Accrued employee benefits		479			1,092
Inventory		916			862
Self-insurance reserves		494			587
Lease incentives		7,438			4,941
Unrecognized tax benefits		0			39
State bonus depreciation add-back		0			426
Net operating loss carry forward		359			0
Other		337			367
Total deferred tax assets		18,092			13,464

Deferred tax liabilities:
Depreciation		12,801			12,058
Capitalized costs		1,017			840
Puerto Rico net operating loss carry forward impact to federal taxes		350			0
Other		11			0
Total deferred tax liabilities		14,179			12,898
Net deferred tax asset		3,913			566
Less current deferred income tax benefit		(2,914	)		(2,496	)
Long-term deferred income taxes	$	999		$	(1,930	)

At the end of fiscal 2012 we estimated state net operating loss carry forwards of $294,000 which expire between fiscal 2013 and fiscal 2023 and net operating loss carry forwards of $350,000 for Puerto Rico which expire in fiscal 2019. As of February 2, 2013, we had no available state tax credits that could be carried forward.

Our unrecognized tax liabilities, as discussed below, relate to tax years encompassing our fiscal years 1999 through 2012, the tax years that remain subject to examination by major tax jurisdictions as of February 2, 2013. A reconciliation of the beginning and ending amount for our unrecognized tax positions, which exclude interest and penalties, is as follows:

(In thousands)	2012		2011			2010

Beginning balance	$	69	$	693		$	1,357
Increases - tax positions in prior period		0		0			0
Decreases - tax positions in prior period		0		(339	)		(617	)
Gross increases - current period tax positions		0		0			100
Decreases related to settlements with taxing authorities		0		(285	)		(147	)
Ending balance	$	69	$	69		$	693

We have recorded $145,000 in unrecognized tax liabilities as of February 2, 2013 in Other liabilities on the Consolidated Balance Sheets. This liability is comprised of $69,000 related to unrecognized tax positions, $41,000 related to accrued interest and $35,000 related to accrued penalties. Our policy is to record interest and penalty expense related to income taxes as a component of income tax expense in the Consolidated Statements of Income. If our uncertain tax positions become recognizable, the amount would affect our effective tax rate.